Market update Jan 2022
Today we are going to talk about what is affecting the short term fluctuation in the market.
On Monday, we saw a correction of 3% in the market. And the next day, after opening in the red, the market rallied back up to end at +1%. So what is happening?
Factors affecting the market
As of 26th Jan 2022 there are a few factors in the environment that are affecting the sentiment of investors. By understanding these, we can understand the short term movement and react better to future similar events.
1. Omicron
2. Oil prices
3. Federal Open Market Committee
4. Upcoming budget for FY 2022-23
Let's take a look at them one by one.
Omicron
The third wave of Coronavirus in India is largely the Omicron variant. This has been growing in the country since January, and we have expected it since November 2021.
When a wave hits, it is expected to slow down businesses, reduce consumption of certain goods (mostly non-essential goods) and impact earning figures for those companies.
Future impact:
Omicron is spreading faster than earlier variants but it looks less severe. Governments across the states are lifting covid restrictions and business activities are not really impacted. Omicron scares have been already priced-in by the market since Nov last year.
Oil Prices
Oil is always strongly negatively correlated with the market, especially in the short term. It has a large impact on everything from the huge import bill for India to the cost of transport which impacts the price of all goods. It is generally an indicator of upcoming inflation.
As of Jan 2022, we have seen the price of Brent crude futures hit $86 per barrel.
Historically this is a spook for the markets and if these prices continue to rise, it is likely going to push the market downwards.
Future impact:
The trend for Oil price in the longer term should be downwards. Once the price of Oil per barrel crosses $60 and above, Fracking becomes profitable. This would mean that at $86 we should see more supply of oil in the market, bringing the price down.
The flip side is OPEC, which is the Oil cartel of the world, always forces its member nations to reduce supply to increase their margin and keep oil prices up. Luckily USA, who is the largest producer of oil in the world, is not a member of OPEC. So let's see where it goes.
Federal Open Market Committee
Fed has hinted at a steady increase of interest rates over the next 1 year. They are meeting on the 26th - 27th of Jan 2022.
We expect a 25 basis point increase in the Federal Reserve bank rate. This has an impact on the amount of money that foreign investors allocate to the 'developing economies' part of their portfolio. We usually see a large exit of funds from FIIs and it leads to a dip in the market.
Future impact:
Since this was clearly expected, we have already seen a large selloff from FIIs (data) in the last few weeks. This makes it unlikely to see too much further selloff.
Financial Budget
Financial budgets usually have a slight impact on the markets. It is all about an expectation mismatch. Many a time investors expect a market-friendly budget leading to a bull run, but don't get it, which leads to a short-term dip. Last year we have seen that before the budget speech, the market was down around 2-3% and during the speech itself it recovered the losses and ended up at +2% within the same day! This was because of no negative surprise which investors were expecting.
Future impact:
If we don't see any negative announcement like an increase in STT, STCG, or LTCG then it is unlikely that this budget session will impact the market adversely. Despite saying all this, the budget announcement is always an uncertain event.
And now, the million dollar question.
How to sail through this Uncertainty?
Even if you have understood the factor that is there in the environment, you never know how the market may react. That is why it is important to have a process in place when making an investment decision based on this in the short term/medium term.
The four rules below should be defined before entering into any trade and you should stick to your rules. Short-term noise should not impact your decision-making.
1) What to Buy
2) When to Buy
3) How Much to Buy
4) When to Sell
Taking an example of today. Let's say you think that all four factors would lead to a net dip in the market. You could take advantage of this in multiple ways.
Maybe you are comfortable with futures and you short the index futures. You could keep a stop loss (maybe 5%) and target profit (maybe 12%) using which you would exit the market. You would only buy 1 lot because it would take approx Rs 1.5L just to make the bet and you are not comfortable losing more than 5% of 1.5L.
Another way is to sell your index ETFs right now and wait for a dip. It's currently trading at 17500, and you keep a buy price of 16850. Here also you can define your lot based on the possible loss you are willing to take.
Conclusion
As most experienced investors know, ups and downs keep happening, but it doesn't affect their decision making.
Emotions and biases are the biggest enemy when investing and having a process and sticking to it is the best way to beat the odds.
